TARP is now over, and it made $15 billion in profits

The fact that the multi-billion dollar bailout program for banks and others ultimately cost the taxpayers less than $0 is an important reminder that many of TARP’s fiercest critics were offering over-the-top and inaccurate complaints. The programs were not drivers of America’s national debt, did not come at the expense of middle-class kitchen-table interests, did not leave the economy saddled with zombie banks, and were not a disastrous failure.

At the same time, TARP fans claiming profitability as vindication are setting themselves far too easy a target. Since the United States government has the ability to manufacture dollars in arbitrary quantities, it is also able to borrow dollars at a lower cost than anyone else. This borrowing ability makes it trivially easy for the federal government to make profitable investments. Issuing Treasury bonds to buy stock-market index funds, for example, would be a surefire profit-maker. But, again, the United States government has the ability to manufacture dollars in arbitrary quantities so there is no reason for it to worry about making profitable investments.

The real question around TARP has nothing to do with fiscal costs. The question is whether the benefits in terms of boosting the economy in 2009-11 relative to a world of more widespread bank failures exceeded the costs to American society of keeping in place a number of mismanaged firms. This is a deep conceptual issue that’s not going to be resolved by counting profits and losses.

There are three basic views you can take on the necessity (or lack thereof) of TARP.

The Banking View. This is the mainstream opinion in American politics. Ben Bernanke believes it. Hank Paulson believes it. Tim Geithner believes it. Barack Obama and George W. Bush and John Boehner and Nancy Pelosi believe it. What it says is that widespread bank failures were the primary cause of the Great Depression, and that avoiding the breakdown of the banking system in the winter of 2008-2009 was critical to avoiding a second Great Depression in the early 21st Century. Proponents of the banking view believe that fiscal and monetary stimulus can and does help boost an ailing economy, but that these things only work if the stimulative boost can be transmitted through the banking system. Let the banks fail, and nothing else will work.

Keynesian and Monetarist Alternatives. Another view is that this is a big mistake. If the economy is slumping, you need to boost the economy with fiscal and monetary stimulus. Within this family of views, different opinions exist on the right balance between fiscal and monetary measures and on what kinds of measures work best. But adherents to Keynesian or monetarist opinions hold that for any level of negative shock, there is some level of countervailing stimulus that could have been applied.

Austrian and RBC Alternatives. The other set of alternative views are associated with either “Austrian” economics or else Real Business Cycle ideas that are popular in academia, though largely shunned by policymakers. The idea here is that demand-driven recessions are a myth and that efforts to combat downturns are misguided and fundamentally doomed to fail. Policymakers should at all times simply focus on doing the best they can to bolster long-term growth.